Supply of new office space will taper to 1.2m sf in 2019 and 1.0m sf in 2020, after a deluge of 2.7m sf in 2017 and 1.7m sf in 2018. CapitaLand Commercial Trust is a prime beneficiary of an upturn in office rent as it is the largest landlord in Singapore’s CBD with grade-A office buildings accounting for 81% of its portfolio NLA. We expect positive rental reversion for Asia Square Tower 2 in 1H19 and CapitaGreen in 2H19.

Maintain BUY. Target price: S$2.11.

WHAT’S NEW

Rental reversion turning positive in 2H19.

Rental for grade-A office space within core CBD has increased 3.3% in 2017 and 11.2% in 9M18. 28% of NLA for CAPITALAND COMMERCIAL TRUST (SGX:C61U)’s office space is up for renewal in 2019, of which 12% is already completed. We expect positive rental reversion for Asia Square Tower 2 (AST2) in 1H19, and Capital Tower, CapitaGreen and Raffles City in 2H19.

In particular, CapitaGreen has NLA of 158,900sf up for renewal with average rent of expiring leases at S$11.07psf in 2H19. CapitaGreen should contribute to positive rental reversion as the building’s current signing rent is S$11-12psf. On a portfolio basis, we expect CapitaLand Commercial Trust to start achieving positive rental reversion in 2H19.

CapitaLand Commercial Trust is set to maintain positive rental reversion in 2020 as the average rent of expiring leases drops further from S$10.70psf in 2019 to S$9.55psf in 2020.

Improved occupancy at AST2.

The Work Project Kingdom (TWPK), a 50:50 co-working JV between sponsor CAPITALAND LIMITED (SGX:C31) and The Work Project, has leased 41,000sf at Asia Square Tower 2 (AST2) for five years with an option to extend for another five years. Occupancy rate at AST2 improved by 5.3% to 98.1%. Contribution from TWPK will kick in starting Jan 19.

Likely to consider AEI for HSBC Building.

HSBC has extended the lease for HSBC Building (21 Collyer Quay) by one year to Apr 20. The agreed rental has increased by 35.8% to S$11.54psf pm (applicable from May 19 to Apr 20). HSBC would relocate to Marina Bay Financial Centre (MBFC) Tower 2 thereafter.

The plot ratio for HSBC Building is already maximised. CapitaLand Commercial Trust is likely to refurbish and convert the building for multi-tenant usage.

Expansion in developed markets within Europe.

CapitaLand Commercial Trust completed the acquisition of freehold office building Gallileo in Frankfurt’s Banking District for €356m or NPI yield of 4.0% in Jun 18. The acquisition is partially funded by loan of €212m with interest rate at 1.4%, which provides a natural hedge while reducing average cost of debt from 2.8% to 2.6%. Gallileo will provide full-year contribution in 2019, compared with six months last year.

There are opportunities to expand to other gateway cities in Germany, such as Berlin, Munich, Hamburg and Dusseldorf. CapitaLand Commercial Trust intends to be anchored in Singapore and will cap exposures to overseas markets at 20% of deposited properties.

STOCK IMPACT

The largest office landlord in Singapore’s CBD.

CapitaLand Commercial Trust focuses on grade-A office buildings, which accounted for 81% of its portfolio NLA as of end-3Q18. Overseas markets accounted for 5% of deposited properties after its maiden overseas acquisition in Germany as of end-3Q18.

Limited supply of new office space coming on stream.

The next leap with CapitaSpring.

CapitaLand Commercial Trust has a 45% stake in the JV to redevelop Golden Shoe Car Park into 51-storey commercial building named CapitaSpring that will have 635,000sf of office space, 12,000sf of retail space, food centre of 44,000sf and 299 serviced residences. JPMorgan has committed to 155,000sf or 24% of NLA at CapitaSpring. It will relocate from Capital Tower to CapitaSpring when the new building is completed in 1H21.

CapitaLand Commercial Trust has the option to acquire the remaining 55% of CapitaSpring from its JV partners CapitaLand and Mitsubishi Estate Co within five years after TOP.

EARNINGS REVISION/RISK

We have fine-tuned our 2018-20F DPU by -3 to 1%, by adjusting our rental assumptions.

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